Patents and Innovation Economics

IPXI is an attempting to create an exchange for the transfer of patent rights. Their website states that they intend to offer Unit Licensing Rights (ULRs) that can be bought and sold on their exchange. A URL represents the right to use a patent in one instance of a product. For instance, if patent A covers a new fuel injection technology, the owner of one URL in patent A has the right to produce one engine using the fuel injection technology. IPXI’s website provides the following example:

For example, let’s say Company A owns a patent on technology that it uses in jet engines. But that technology also has applications in the production of truck engines. So, Company A decides to offer a ULR contract on IPXI permitting the purchaser to produce 5,000 units of its product with Company A’s patented technology. Company B, a truck manufacturer, realizes the usefulness of the patent and purchases the ULR contract from Company A through the exchange. Company B now owns a license to produce 5,000 truck engines using Company A’s technology.

The reported goal of IPXI is to reduce the cost of licensing technology compared to the present method of bi-lateral lawyer heavy negotiations. This is a noble goal, but IPXI’s website is very short on specifics. Apparently, this is because the exact methods of the exchange will be worked out by the founder members sometime in the future. Right now IPXI is trying to find enough founding members to make the exchange viable.

I have written on ideas to create such an exchange. For instance see Jump Starting a Secondary Market for Patents , in which I argue that Standards Committees could be converted into an exchange for transferring patent rights. I note that IPXI founders are going to function very much like a standards committee.

Here are some of the problems in no particular order that will need to be resolved in order for IPXI to be viable.

Market Exclusion: In IPXI’s example above, it is not clear that Company A can exclude the purchasers of its ULR from making a competing product. The licensing fees may not make up for the lost market share, in which case companies will only offer patents that have no strategic value to themselves.

Number of ULRs: Are the number of ULRs for a patent limited? If they are limited, a company is going to be reluctant change their manufacturing process to incorporate this new technology. Also the company will be reluctant to buy all the potential number of ULRs they might need up front. If they are not limited, then the purchaser is going to worry about dilution of their ULR shares. If they pay ten dollars per URL today, will the company holding the patent right suddenly flood the market next year and they could buy the ULRs for a dollar next year?

Validity: What if the patent underlying the ULR turns out to invalid? Is the money refunded? Is the patent researched for validity before the offering? If so are there any guarantees associated with the opinion?

Infringement Offensive: Who is responsible for defending a patent if it is infringed. Clearly, the value of my ULR decreases if the underlying patent is being infringed. The best answer to this question would be that IPXI defends the patent, sort of like ASCAP. In that case IPXI would undertake its best efforts to defend the patent if it agreed the patent was being infringed. There would be no ramification if IPXI were unable to prove infringement. Unfortunately, this does not meet the stock exchange model.

Infringement Defensive: Are the seller’s of the ULR in the patent guaranteeing that practicing the patent does not infringe any other patents? Is the issuer or IPXI going to conduct a clearance search? If not the value of the ULR are going to suffer accordingly. If the underlying patent is contested in court, who has the responsibility for defending the patent? I believe the best way to solve this problem is to have IPXI defend the validity of the underlying patent. But what if this causes a conflict between two patents that IPXI has issued ULRs for?

Accounting: How does the issuing company know that the purchaser only built the number of licensed items they purchased ULRs for? Does anyone have a right to an accounting? If so who?

Process patents: How does the ULR deal with process patents? What if the process is not related to a number of units? For instance, what if I have a way of processing integrated circuits? Do the ULRs apply to the number of wafers? What if the wafer diameter changes? What if the pitch on the wafer shrinks?

Exclusive Licenses: IPXI admits that its present model only works for non-exclusive licensing. I think this is a minor problem.

Conclusion

I think IPXI’s goal is admirable. However, I think there are a large number of issues to resolve before the idea is viable. Ultimately, I believe IPXI needs to take on a much larger role than a standard stock exchange. I think an enhanced ASCAP model is more likely to be viable.